Fed likely to hold rates amid US-Iran war, economic weakness
What's the story
The US Federal Reserve is expected to keep interest rates steady in its upcoming meeting, owing to the ongoing US-Israel war on Iran and recent economic data showing signs of weakness. The two-day meeting will begin on Tuesday, with an announcement on the benchmark lending rate scheduled for Wednesday. Last year, the central bank had cut rates three times in a row before holding them steady at its January meeting.
Policy challenges
Fed's dual mandate under threat
The Federal Reserve has a dual mandate: to keep inflation near a long-term target of 2% and to promote maximum employment. However, the ongoing war in the Middle East is pushing global oil prices higher, which could raise overall inflation while slowing growth. This has led analysts to believe that policymakers are unlikely to take any action at this time.
Economic impact
War could push inflation above 4%
Despite consumer inflation falling from a pandemic peak of 9.1%, it remains well above the Fed's 2% target. KPMG's chief economist Diane Swonk warned that the Iran war could push inflation above 4% again. This situation complicates President Donald Trump's political landscape as affordability remains a key issue for his administration amid rising prices of basic goods.
Policy dilemma
Unemployment rate rises to 4.4%
Raising rates to cool the economy could conflict with the Fed's other mandate of managing unemployment. The US unexpectedly lost 92,000 jobs in February while the unemployment rate rose to 4.4%. Analysts say a relatively steady unemployment rate has masked churn beneath the surface as labor demand drops but doesn't spike due to Trump's immigration crackdown.
Market forecasts
US GDP growth revised sharply lower
Ahead of the Fed meeting, recent data shows US GDP growth was revised sharply lower in late 2025. Some Fed policymakers have been cautious about the potential inflationary shocks from the war. However, Swonk warned that any economic slowdown due to this conflict could be hard to recover from in the short term. "I think people are discounting the risk of the lingering effects," she said, adding supply disruptions impact more than just oil prices.